Our fate to repeat credit mistakes?
Recently the commentary noted, “The Federal Reserve should revise mortgage-securitization and -servicing rules to make lending to first-time buyers, young self-employed people and those with prior defaults easier, said JPMorgan Chase CEO Jamie Dimon. He said less onerous rules would have let his bank extend many more loans.”
The note prompted one veteran loan officer vet to sum up the thoughts of many in the industry. “Sure, low quality loans that they sell to unsuspecting MBS investors. When will they ever learn? I believe there could be a lessening of onerous rules, and still have good loans – we just cannot have ‘nothing’ loans, and yet residential lenders seem determined to head down that path again. The financial industry has proven over and over it is not able to control the quest for higher profits, with no consideration for the consequences.
“I remember the original stated income loans for self-employed borrowers. They were required to have HIGH credit and 25% down/equity, and one year of cash reserves. We all know how that good/reasonable loan program morphed into a ‘lousy’ loan. VA is a good example of quality loans with no down payment. But borrowers had good income and residual income, along with good credit. The FHA low down payment mortgage was a proven product. Still, income and credit required.
“The one area I would like to see lessening of onerous requirements is the seasoning period for foreclosures and/or short sales, if the event occurred due to the economic collapse. Seven years is a long time to keep quality borrowers out of the market. Often the individual followed ‘legal’ advice that provided remedy at the time, but caused serious difficult for homeownership down the road. Most had no clue.”
One potato, two potato, three potato, four…
A while back I published a note from Mat Ishbia, President and CEO of United Shore, regarding the difference between retail, wholesale, and correspondent originations, and the problem with double counting. (As an example, occasionally people will point out that NAR’s real estate stats appear to count sales AND purchases, thus double counting. The MBA, in its weekly application data, counts only retail applications – the source of the loan.) Explaining the concept that “correspondent” isn’t really a channel or any different than MSR buyers is something that many people may not realize.
“The basic concept is that ‘Mortgage Originations’ should not include correspondent loans. (Not that it can’t be tracked, but it is just not relevant for originations.) A correspondent Lender just ‘buys’ a closed loan from a retail or wholesale lender. They often didn’t underwrite, or close the file, or even originate it or fund it. They are the exact same as MSR purchases, but just on a 1 by 1 basis.
“When a loan is eventually funded, it is important to remember who does what in terms of originating & processing the loan, underwriting it, preparing the closing docs and closing the loan, funding the loan, and then servicing the loan. These vary depending on if the institution is a retail lender, wholesale mortgage broker, or correspondent lender/investor.”
In response from Kentucky I received, “Is the MBA billing different members on the same loans? Having just renegotiating our MBA renewal, I was disappointed that our volume-based membership fee had to include correspondent loan numbers (by volume, not units). I attempted to make the same argument as you have presented, but quickly gave up. All that to say, correspondent dollars are being double dipped in MBA renewal based calculations as well.”
If I understand your question, you’re saying that if ABC Mortgage belongs to the MBA, their dues are based on their originations. And if they sell all their originations to a correspondent investor, then that investor’s dues are based on those same loans. That is above my pay grade to determine, and I imagine that there are other considerations, but any questions about MBA membership calculations should be addressed to Pete Mills.
How am I supposed to compete with granite countertops?
I continue to receive inquiries regarding the legality of builder incentives for using a certain lender. As you can guess, these come from LOs at competing lenders. Nothing has changed for years, nor is it expected to, concerning RESPA and builder-related home loans. One industry vet pointed out, “In the pre-internet, pre-Dodd Frank world that existed circa 1974, Congress altered the free market through passing RESPA, which caused the need for affiliated business legislation in the 1980’s. RESPA was designed to lower costs for consumers on the premise that referral fees increased costs unnecessarily. Empirically, over 30 years later, that premise for RESPA may or may not continue to be valid, but if you don’t like that law or affiliated business arrangements, you’ll need to elect or lobby politicians to effect a change.”
Nope, builder incentives are still not a RESPA violation if done correctly, much to the dismay of lenders trying to grab builder business from the “in house lender.” This commentary had addressed this a number of times, most recently here. Builders, realtors and others have been allowed to have affiliated mortgage companies since the controlled business (now known as affiliated business) exception to RESPA was put in place by Congress and HUD in the 1980’s, so it’s not a new thing since 2000.
I wanted to repeat previous quotes and information on the topic below.
J. Steven Lovejoy, Esq. with Shumaker Williams, P.C. wrote, “Fortunately or unfortunately, depending upon your point of view, builders are not prohibited by any federal rule or regulation from offering financial incentives to a buyer/borrower if the borrower uses a builder-designated mortgage company (usually an affiliate of the builder owing to some common ownership). Why doesn’t this violate the anti-referral fee provisions of RESPA? RESPA permits financial incentives to be paid by a settlement service provider to a borrower. Thus, if a lender wants to offer ‘no closing cost,’ ‘free appraisal,’ or other financial incentives to attract customers, RESPA presents no impediment. This means that, for example, a title company, a mortgage company and a real estate broker could get together and offer a discount on each of their services to consumer buyer/borrowers if the customer uses all three companies. If there is common ownership of these three companies, the owners could legally derive financial returns based upon their ownership interests, notwithstanding the fact that a referral was made among the companies. This is the classic ‘affiliated business arrangement’ that RESPA expressly allows.
“So, the builder is allowed to steer the buyer to a preferred lender by offering financial incentives to the buyer/borrower. What the builder cannot do is have the mortgage company pay anything to the builder for the referral, or pay for any of the incentives which the builder is offering to the buyer. That would constitute an illegal kickback under RESPA, even if the builder and the mortgage company were related by common ownership.
“The last point to be made here is that the CFPB’s ATR/QM rule has had the effect of discouraging affiliations between mortgage companies and other service providers. This is because the maximum 3% ‘points and fees’ which the lender must stay within for a loan to be considered ‘QM,’ will include settlement service fees charged to the borrower by an affiliate of the lender. In recent years we have seen mortgage companies divest ownership in a title company to make sure they could meet the QM 3% maximum standard.
“Builders, however, are different. The services they offer are not “settlement services” under RESPA, so even if the builder and the mortgage company are affiliated, the ATR/QM rule does not require builder compensation to be included in the 3% calculation.”
Builders argue that a close working relationship with a mortgage lender greatly facilitates their sales process and leads to fewer “glitches” and better overall customer satisfaction.
Phil Shulman with K&L Gates reported, “RESPA does not consider a consumer incentive to be a required use. Therefore, the builder can offer a consumer an incentive to use their affiliated lender without violating any laws. The offer is voluntary, and the consumer is free to shop for a better rate elsewhere. In fact, the builder is required to provide the consumer with and affiliated business disclosure form which specifically advises the consumer that they are not required to use the builder’s lender and are encouraged to shop around for a better price.
“As for marking up the price of the home to cover the incentive to use the builder’s lender, that is another story. The discount must be a true discount and not be the result of a markup elsewhere in the transaction.”
Can I ask you a few questions?
Industry veteran Tom LaMalfa weighed in with his thoughts on the recent MBA National Conference. This year’s survey was sponsored by Fannie Mae, and Tom canvasses attendees of all shapes and sizes with a series of questions, and then kindly distributes his findings & Scorecard. If you want the full report, write to Tom; I’ve edited it here.
“From my perch, the mood of this year’s conference was upbeat but cautious. With refi activity slowing, volume won’t match 2016’s. Guarded optimism among market participants was my key takeaway from this conference. The Trump administration’s foibles were the conference’s most discussed topic.” [Editor’s note: “foibles” is a great word not used often enough.]
“When asked if production was up, down, or flat to date this year compared to 2016, most of the 28 executives surveyed reported production dollar volumes were down. Only 7 reported higher production volume, with 2 others reporting flat compared to 2016. Purchase business accounted for an average of 72.6% of the entire group’s origination activity.
“Agency–defined as Fannie Mae and Freddie Mac– conventional volume accounted for 62.1% of production, and government-insured volume averaged 27.5% for the group. FHA volume for the year was reported up at 12 firms, down at 13 and unchanged at 3 others.
“When asked about growth in riskier loans this year (high LTVs, high DTIs and low FICOs), the responses were mixed, with 16 reporting yes versus 12 saying not. Most executives expected aggregate industry production to slow in 2018. Regarding operating expenses, over half of respondents reported higher expenses year-over-year.”
Tom’s report showed that the profit picture was very much a mixed bag (some exceeding 2016, a few flat, but most were down), as was their company’s plan for retaining or buying servicing (some buyers, some sellers, some retaining – that’s what makes a market, right?). The concerns about Ginnie Mae servicing had lessened slightly over the last year.
Tom’s write up goes on to cover thoughts on Fannie & Freddie product & technology suite, as well as compliance costs, home price opinions, margin compression, how much the cost of a mortgage loan increased post the 2008 Financial Crisis and Dodd Frank, MSAs, online originations, HMDA’s effect on compliance, etc.
“Don’t hold your breath for GSE reform in 2018, indicated the responses to Q37. By a tally of better than eight-fold, the executives discounted any hope for Congressional action for the GSEs.”
Write to Tom LaMalfa directly if you want the complete report.
Several men are in the locker room of a golf club. A cellular phone on a bench rings and a man engages the hands-free speaker function and begins to talk. Everyone else in the room stops to listen.
WOMAN: “Hi Honey, it’s me. Are you at the club?”
WOMAN: “I’m at the shops now and found this beautiful leather coat. It’s only $2,000; is it OK if I buy it?”
MAN: “Sure, go ahead if you like it that much.”
WOMAN: “I also stopped by the Lexus dealership and saw the new models. I saw one I really liked.”
MAN: “How much?”
MAN: “OK, but for that price I want it with all the options.”
WOMAN: “Great! Oh, and one more thing… I was just talking to Janie and found out that the house I wanted last year is back on the market. They’re asking $980,000 for it.”
MAN: “Well, then go ahead and make an offer of $900,000. They’ll probably take it. If not, we can go the extra eighty-thousand if it’s what you really want.”
WOMAN: “OK. I’ll see you later! I love you so much!”
MAN: “Bye! I love you, too.”
The man hangs up. The other men in the locker room are staring at him in astonishment, mouths wide open.
He turns to the room and asks, “Anyone know whose phone this is?”
Visit www.robchrisman.com for more information on our industry partners, access archived commentaries, or to subscribe to the Daily Mortgage News and Commentary. If you’re interested, visit my periodic blog at the STRATMOR Group web site. The current blog is, “Servicing: All It’s Cracked Up to Be?” If you have both the time and inclination, make a comment on what I have written, or on other comments so that folks can learn what’s going on out there from the other readers.
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